- Property is still one of the best financial investments possible.
- First-time buyers often don’t have enough money saved for the required deposit.
- Parents can gift or lend money to their children for a deposit.
- This has tax implications. Donations less than R100 000 will not be taxed.
Parents love nothing more than seeing their adult children financially stable. Once they’ve secured a job, the next step is often an investment in property. Many people still see property as the best investment and young adults are encouraged to invest as early in their career as possible.
If first-time buyers are to do that alone, as in without help from their parents or guardians, a job that pays enough to afford a repayment on a home loan (given that they are not carrying excessive debt and have a good credit score) is the first priority. Finding money for a deposit is the second.
It’s clear that the higher the deposit, the lower the bond required and the better the chances are of getting bond approval from a bank. But it’s a Catch 22. Being new to the job market means limited time to have accumulated that much-desired deposit and this may be the area where parental assistance is sought.
Gifting a deposit to a family member has tax implications if donations add up to more than R100 000 in a year. According to SARS, “the first R100 000 of property donated in each year by an individual is exempt from donations tax”. That means a once-off donation that is less than R100 000 will not be taxed. For example, if your parents give you R75 000 for a deposit this will be tax-free but if they donate R135 000 towards a deposit, they will have to pay 20% tax on the amount over the R100 000 threshold. In other words, 20% of R35 000 would equal R7 000 payable in donations tax.
Some first-time buyers may have parents with the means to assist them with money for a deposit, whether as a gift or a loan. According to Marius Tinney-Crook, provincial sales manager at ooba, many young adults can afford home loan repayments, but are unable to secure a bond as they don’t have the required deposit available. The average deposit is about 10% of the purchase price and as banks tend to look favourably at buyers with a deposit, not having one may result in a bank not approving a home loan application. Having a deposit also means that the bank will approve the home loan at a cheaper interest rate than a 100% bond. This will save the first-time buyer thousands of rands over the life span of the loan. “Parents inherently want their children to succeed in life and, after education, helping your children invest in property is another way of ensuring financial security,” says Tinney-Crook. “Parents should be aware of the tax implications of such a gift. Funds given towards a deposit as a gift that exceed R100 000 during any tax year are subject to a donations tax, for which the donor, in this case the parent, is liable,” he says. “If the money takes the form of a loan instead, this offers flexibility with regards to payment terms. Parents may choose to allow their children to pay back the interest after the initial lump sum has been repaid.”
Formalise the agreement
When deciding which path to follow, it is important that all parties involved are comfortable with the arrangement. “It is advisable to draw up a formal document to ensure all family members are on the same page as to whether the money is a gift or a loan, and what the terms of the agreement are, for example what interest will be paid and when the money will be paid back. While it might seem a bit extreme when dealing with family, it is important that this is drawn up and signed by all parties so that there are no misunderstandings down the line,” says Tinney-Crook.
Once you are ready to own your own home, find out how much you can afford using the ooba Bond Indicator. Then, if you think you can afford the repayments, get prequalified or apply for a home loan with ooba today – South African’s largest home loan comparison service.